Daily Archives: February 23, 2011

James Politi

Goldman Sachs has waded into the raging political war over US fiscal policy, with a note explaining the economic ramifications of the battles on government spending, a possible shutdown of federal operations, and even the furore over collective bargaining rights in Wisconsin and some other midwestern states.

On the budget itself, Goldman economist Alec Phillips says the Republican plan approved by the House of Representatives last Saturday – with $61bn in spending cuts between now and September, would lead to a drag on US GDP growth of 1.5 to 2 percentage points in Q2 and Q3, before it tails off.

Mr Phillips also points out that the more likely scenario – a compromise with $25bn in spending cuts – would lead to a 1 percentage point hit to GDP growth in Q2, fading thereafter, with “negligible” impact on growth by the end of the year.  

Ralph Atkins

In its early days, the European Central Bank would talk of the eurozone only as a single bloc. But after the crises of the past year, the euro’s monetary guardian now sees a clear need to monitor individual countries closely.

Speaking this evening in Liège, Jean-Claude Trichet, president, has positioned the ECB firmly behind plans being drawn up in Brussels to step-up economic surveillance based on national indicators. He cited seven variables that ECB staff had identified as providing “early warning signals when macroeconomic imbalances emerge and when countries are experiencing significant losses in competitiveness, or when there are risks thereof”. 

“The ECB should not issue public ratings to be used for regulatory purposes,” runs the response to an idea from the Commission. And the jury is also out on a publicly-funded agency other than the ECB issuing ratings.

Questions of independence are behind the ECB’s ratings reluctance. While the central bank does undertake in-house credit assessments, “the conduct of rating activity as in-house credit rating assessments always raised questions regarding reputation risks and potential conflicts of interest, beside other risks,” says the report.

As for an alternative, publicly-funded, body running the ratings, questions remain over independence and competition. “The degree of independence of such an agency funded wholly or partially by public money remains to be assessed,” says the report.  Aside from manpower and data requirements, it is also unclear whether “the creation of a semi-public agency would result in increasing competition, or rather create artificial barriers to entry for new private entities and therefore ultimately reduce competition”.

The spirit of the proposal was accepted, however, and the idea itself was not entirely scotched. 

Hot on the heels of a strong devaluation and a raise in the refinancing rate to 11 per cent, Vietnam has increased its reverse repo rate 1 percentage point to 12 per cent. No word yet on the base and discount rates, both last raised in November; they stand at 9 and 7 per cent, respectively.

Raising borrowing rates in Vietnam is an attempt to curb inflation, which will have been encouraged by the devaluation. Prices rose by 12.3 per cent in the year to February, following a 12.2 per cent rise to January, against a target of 7 per cent. Weakening the dong will make imports more expensive, which in the case of goods such as energy will work to push up dong-denominated prices generally.

Spencer Dale joined the hawk camp this month, latest minutes show. Now three of the nine Bank of England members are in favour of a rate rise, compared to two last month and one the month before.

Andrew Sentance, the original hawk, upped his rate rise request from 25bp to 50bp, or half a percentage point. Martin Weale and Spencer Dale preferred a quarter-point rise.